Revenue Raisers in Inflation Reduction Act Better Position U.S. for Ending Tax Dodging by Multinational Enterprises
WASHINGTON, DC – The Financial Accountability and Corporate Transparency (FACT) Coalition welcomes inclusion of critical investments in the Internal Revenue Service (IRS) and important but incremental steps to tackle tax dodging by multinational enterprises as part of the Inflation Reduction Act of 2022 passed by the Senate this weekend. FACT is now calling on the House to pass this bill so that Congress can turn to permanently ending incentives for large multinationals to dodge taxes by shifting profits offshore and eroding the U.S. tax base at the expense of America’s working families and international democracy.
The Inflation Reduction Act directs $80 billion dollars in additional funding to the IRS over the next 10 years, creates a 15% worldwide corporate alternative minimum tax (CAMT) on the financial income of the largest multinationals, and imposes a 1% stock buyback excise tax on publicly traded corporations. Each of these changes is estimated to raise substantial revenue and counter tax dodging practices that are available to multinational enterprises.
“Stable, increased funding for the IRS is a long-overdue and practical investment for the United States,” said Ryan Gurule, Policy Director at the FACT Coalition. “With these funds, the IRS will be able to reinvent itself after years of underfunding and finally tackle tax evasion by the wealthiest taxpayers who often use complex legal structures to take advantage of the understaffed and overwhelmed agency. Passing this legislation will mean finally lifting the tax enforcement burden off of lower and middle class families.”
While increased IRS funding promises to enable improved tax administration activities, the Inflation Reduction Act also begins to reverse a decades-long trend of tax reform that entrenches multinational tax dodging.
“This Inflation Reduction Act represents a transformative shift toward finally making large multinational corporations pay a fairer share of taxes, and the House should act quickly to pass it,” said Ian Gary, Executive Director of the FACT Coalition. “But this bill cannot be the final chapter in the fight against profit-shifting and offshoring practices by large corporations. There is still too much vital revenue on the line, as tax dodging multinational corporations are still able to play games with their operational and accounting practices to shift hundreds of billions of dollars in profits each year to secretive tax havens.”
Left out of the Inflation Reduction Act were key fixes to the U.S. international tax code that would more definitively remove the incentive for large multinationals to shift profits offshore or erode the U.S. tax base. These reforms would also further an international tax agreement between 137 jurisdictions, including the United States, brokered at the Organisation for Economic Cooperation and Development (OECD). In particular, the second pillar (Pillar 2) of the OECD agreement would create a global 15% minimum effective corporate tax rate, applied on a country-by-country basis that would apply to a broader base of large multinationals than the CAMT. The Build Back Better Act would have revised the current minimum offshore profits tax in the United States–the global intangible low-income (GILTI) tax–which currently applies at only a 10.5% rate and on an aggregate basis, to reflect many of these changes, as well as made other international tax changes consistent with Pillar 2.
“The corporate alternative minimum tax (CAMT) is not a rejection of the OECD’s global minimum tax under Pillar 2; nor is it an adequate substitute technically or internationally,” said Gurule, “While CAMT emphasizes the commitment of the United States to tax global operations of large multinational corporations, it fails to tackle the multinational tax dodging problem in a way that can really only be addressed by applying corporate taxes on a multilateral and country-by-country basis.”
FACT urges Congress, as well as Treasury and OECD members, to remain committed to enacting and improving the two-pillar framework. The multilateral nature of OECD reforms creates an important opportunity to:
- permanently end tax dodging through profit shifting and base-erosion practices by multinationals;
- create more stable tax policy for businesses and a level playing field regardless of location of headquarters, operations, or profits being booked–decreasing the incentive to engage in tax competition by global governments; and
- advance multilateral global solutions to the world’s most pressing challenges, including threats to global democracy and climate change.
“Advancing Pillar 2 will continue to raise U.S. revenues in a way that is rooted in sound tax policy for all stakeholders,” said Gary. “It will also continue to position the United States as a global leader in tackling other international challenges on a multilateral basis and in improving our international institutions of democracy.” The FACT Coalition has previously elevated concerns regarding the OECD process from developing nations, requiring careful reflection on current democratic failures in multilateral tax negotiations, including based on equity, access, and transparency principles.
“Our global tax systems have been abused in recent years to enable certain actors to play by a different set of rules, robbing governments in the U.S. and around the world of the resources they need to address collective challenges and undermining faith in our democratic institutions,” said Gary. “Advancing Pillar 2 can fortify the foundation of our fiscal house by discouraging tax dodging, promoting greater multilateral coordination to our greatest global challenges, and raising real revenues.”
Notes to the Editor:
- The text of the Inflation Reduction Act can be found here, though certain key amendments are not yet reflected in the final text. Notably, the stock buyback tax, among other issues, addresses a potential tax preference for stock buybacks versus dividends. This is especially true for foreign investors (who now own as much as 40% of U.S. equities), as dividends may be subject to withholding tax and stock buybacks may not be taxable transactions to foreign shareholders.
- Due to years of underinvestment by Congress in adequate IRS staffing and technology funding, IRS audits now fall disproportionately on low and middle income taxpayers. Increased funding from the IRS promises to reverse this trend. The additional IRS funding is to be used as directed by Congress to shore up enforcement, improve taxpayer services, modernize business systems and more. The Congressional Budget Office (CBO) informally estimates that these investments will raise $204 billion dollars in the next ten years. Others, including former Secretaries of Treasury and IRS commissioners have predicted that these investments will return far more in a very progressive manner.
- The CAMT will apply to those corporations earning more than $1 billion in income annually on average (or $100 million in U.S. income annually in the case of foreign headquartered multinationals). For applicable companies, the CAMT would apply in place of the domestic corporate tax, including GILTI. GILTI currently creates an effective minimum tax equal to 10.5% (or, up to 13.125% based on related foreign tax credit limitations) on aggregated foreign profits. Because CAMT will apply on a worldwide basis at the higher 15% effective tax rate, CAMT may decrease the incentive for the largest multinationals to dodge taxes by shifting highly mobile profits. The Joint Committee on Taxation identified up to 200 large multinationals averaging $8 billion in annual income that paid less than a 15% effective tax rate in 2019, and close to 125 such companies that paid an average annual effective tax rate of just 1.1% in 2019.
- Among other differences between CAMT and Pillar 2, CAMT would apply to a much smaller base of entities (as Pillar 2 would apply to multinationals generating in excess of 750 million EUR annually) and CAMT would not apply on a country-by-country basis. Failing to apply a corporate minimum tax on a country-by-country basis, as is the case with CAMT or the current GILTI, can encourage increased profit shifting. Without country-by-country application, multinationals can blend less mobile high-tax income and related foreign tax credits with more mobile income–such as royalties–booked in tax haven jurisdictions to shortchange governments and increase the incentive for governments to engage in deleterious tax competition.
- OECD international tax agreement agreed to by 137 jurisdictions, and recent guidance on model rules and additional commentary for implementing Pillar 2 of the rules.
- Build Back Better Act as passed by the U.S. House of Representatives.
- Prior FACT analysis of the Build Back Better Act and included international tax reforms. The United States is currently the only major economy that imposes a minimum offshore tax on its multinational corporations through GILTI and BEAT (and now CAMT). If the EU advances Pillar 2, which it remains expected to do, U.S. multinationals may face up to four minimum tax regimes (GILTI, BEAT, CAMT and Pillar). While GILTI and BEAT have not demonstrated any competitive disadvantage for U.S. multinational corporations, FACT has demonstrated how the top-up tax mechanisms created under the global minimum corporate tax created by Pillar 2 levels the competitive playing field for multinationals regardless of where they are headquartered, operating, or booking profits. Doing so more completely removes the incentive for tax dodging by multinationals, as well as the incentive for global governments to engage in tax competition untethered from real operations to attract investment. Combined with Pillar 1 of the agreement, which would reallocate certain taxing rights to countries in which multinational goods and services are consumed and preempt similar taxes, the OECD agreement would increase global government revenues and tax certainty for multinationals. These twin aims are harder to achieve on a unilateral basis.
- Earlier JCT scores relating to Build Back Better GILTI reforms can be found here.
- FACT has previously elevated serious concerns around the transparency, participation, and equity of OECD negotiations here, and advocated for the United States to be a leader in making international tax processes more democratic.